Published on 5/29/2026
Inflation in the euro zone’s largest economies remained above the European Central Bank’s target of 2% this May, strengthening the justification for raising interest rates for the first time since 2023, in light of rising energy costs resulting from the US-Israeli war on Iran.
Preliminary data showed that inflation accelerated in France to 2.8%, Italy to 3.3%, and Spain to 3.6%, while inflation in Germany remained above the European Central Bank’s target, despite slowing on the basis of the local index to 2.6%.
According to Bloomberg, these readings give European Central Bank officials new indications of the extent to which the energy shock resulting from the Iran war has been transmitted to consumer prices, and whether the current pressures will push them to act at their next meeting.
According to the agency, the markets are betting on raising interest rates by a quarter of a percentage point next month, with the possibility of another hike before the end of the year, after inflation has now exceeded the European Central Bank’s target in the four major economies in the euro zone.
Energy stress
The European Central Bank’s concerns are based on the fact that the energy price wave is no longer necessarily a passing shock, as the bank said in its decision issued at the end of last April that the war in the Middle East led to a sharp increase in energy prices, pushed inflation up and weakened economic sentiment.
The bank added that the effects of the war on inflation and economic activity in the medium term will depend on the severity and duration of the energy shock, and the size of its indirect and secondary effects, that is, the transmission of the increase in energy to the prices of goods, services, and wages.
The European Central Bank had left its key rates unchanged at its previous meeting, but stressed that it would follow a data-driven approach at each meeting, and that its next decisions would be based on an assessment of inflation prospects and risks, the dynamics of core inflation, and the strength of the transmission of monetary policy to the economy.
The May reading comes after annual inflation in the euro zone rose to 3% in April, up from 2.6% in March, according to estimates by the European Union’s statistical office (Eurostat), and the energy component was the fastest rising among the main components, recording 10.9%.
The largest economies
In Spain, the National Institute of Statistics said coordinated inflation reached 3.6% in May, and core coordinated inflation rose to 3.3%, while the local consumer price index was 3.2%.
In Italy, data from the National Institute of Statistics showed that coordinated inflation rose to 3.3% in May from 2.8% in April, driven especially by unregulated and regulated energy prices, transport services and entertainment.
As for Germany, data from the Federal Statistical Office showed that inflation according to the local consumer price index slowed to 2.6% in May from 2.9% in April, but core inflation, which excludes energy and food, reached 2.5%, while energy prices remained 6.6% higher on an annual basis.
Eurostat is scheduled to publish the preliminary reading of inflation in the euro zone, which includes 21 countries, next week, amid expectations that the reading will remain above the 3% level recorded in April.
Raising interest
A number of European Central Bank officials sent signals paving the way for tightening monetary policy, as Executive Board member Isabel Schnabel said, in an interview with Reuters, that the incoming data increasingly indicate that the energy shock is being transmitted to broader inflation developments, and that ignoring it is no longer an option.
European Central Bank chief economist Philip Lane believes that borrowing costs may need to rise if inflationary pressures continue, while Lithuanian Central Bank Governor Gediminas Shimkus suggested the possibility of two interest rate hikes being needed.
In Italy, Central Bank Governor Fabio Panetta said that prospects appear to call for resetting the monetary policy stance to confront the risk of continued inflation tensions.
European monetary policy faces a difficult trade-off, as raising interest rates may help contain inflation and stabilize expectations, but it may increase the cost of financing for families and companies at a time when indicators of economic activity have begun to weaken.
Slow growth
The European Commission says that the euro zone economy is heading toward slower growth due to the new energy shock, as it lowered its growth forecast for the region to 0.9% in 2026 and 1.2% in 2027, and raised its inflation forecast to 3% in 2026 and 2.3% in 2027.
The International Monetary Fund agrees with this trend, as it said in its regional report on Europe that the continent is exposed to a new energy-driven shock linked to the war in the Middle East, which puts pressure on growth, raises inflation, and increases uncertainty.
